Canadians rejoice! We were greeted this September by a rate cut that brought our key interest rate from the Bank of Canada down to 2.5%. While we still have a little ways to go to reach that 2% goal, investors and beyond were quite happy to see rates come down. But, what if there’s more?
In this case, there’s one dividend stock I’d buy should the Bank of Canada offer up multiple quick cuts. That dividend stock is Canadian Apartment Properties Real Estate Investment Trust (TSX:CAR.UN), known as CAPREIT. So let’s get right into why it’s a top dividend stock to consider on the TSX today.
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Cost advantage
First, let’s look at the cost advantages for CAPREIT under multiple rate cuts. The most obvious advantage is lower borrowing costs from a refinancing advantage. Potential rate cuts might mean that CAPREIT could refinance existing debt at lower rates, reducing interest expenses and improving net income.
Furthermore, this can be particularly beneficial since the trust currently holds a debt position. Therefore, lower rates and refinancing would mean improved financial flexibility and cash flow. Meanwhile, lower rates also mean lower capitalization rates. This can increase the valuation of real estate assets. This would immediately enhance CAPREIT’s balance sheet, leading to improved credit terms and conditions.
Economic boost
Not only do lower rates reduce costs, but they may raise asset values as well. Lower rates can often drive demand for real estate assets. That’s because investments in assets like rental properties can be more appealing when we can invest in them as property values increase and bond yields drop.
What’s more, the demand helps to stimulate economic activity. This can translate into more renters entering the market, improving occupancy rates for companies like CAPREIT. This could help increase rental rates as well.
A delicious dividend
With all that support, lower rates help CAPREIT keep its dividend strong and growing. As interest rates drop, fixed-income products like bonds become less appealing relative to dividend stocks like CAPREIT. Its current yield sits at 3.7%, and this can be far more compelling for income-seekers. In fact, here’s what an investment of just $7,000 might look like on the TSX today.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| CAR.UN | $41.13 | 170 | $1.53 | $260 | Monthly | $6,992 |
Furthermore, add in that CAPREIT continues to go through capital recycling initiatives. With lower rates, it can more effectively implement this strategy, enhancing its portfolio through acquisitions and improvements. This will create even more dividend growth in the future – something every income investor will appreciate, especially when it comes to a long-term hold.
Bottom line
Multiple cuts could be coming, and if that’s the case, dividend stocks like CAPREIT certainly stand to benefit. Whether it’s the lower borrowing costs, higher demand, or favourable economic conditions, it’s in a strong position. Of course, risks always remain, such as rates staying higher for longer. However, CAPREIT still offers a compelling opportunity for investors seeking out stable income and growth potential as the real estate markets heat up once more.
